Trapped factors and China’s impact on global growth

Bloom, Nicholas, Romer, Paul, Terry, Stephen and Van Reenen, John ORCID: 0000-0001-9153-2907 (2015) Trapped factors and China’s impact on global growth. CEP Discussion Papers (CEPDP1261). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

When China’s accession to the WTO exposed European firms to import competition, they responded by increasing their investment in innovation. This response was stronger in industries and firms where factors of production were less mobile. Motivated by this evidence, we incorporate “trapped factors” at the micro level into a general equilibrium model of product-cycle trade and growth. In a calibrated version of the model that starts with a baseline growth rate of 2%, trade integration between the OECD and low-wage countries can increase the steady-state growth rate to 2.4% per year. Factors that are trapped at a firm by an unexpected change in trade policy do not change this long-run growth rate, but in the medium run, they could have a noticeable effect on aggregate growth. Simulations of the model show that in the first decade after liberalization, growth jumps to 2.7% per year and that trapped factors account for almost all of the 0.3% = 2.7% − 2.4% increase above the steady state growth rate.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information:	© 2015 The Authors
Divisions:	Economics Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor J Political Science > JQ Political institutions Asia, Africa, Australia, Pacific
JEL classification:	C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data D - Microeconomics > D8 - Information, Knowledge, and Uncertainty D - Microeconomics > D9 - Intertemporal Choice and Growth > D92 - Intertemporal Firm Choice and Growth, Investment, or Financing E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity
Date Deposited:	26 Nov 2014 14:27
Last Modified:	11 Dec 2024 19:17
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/60272

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